1. 6/4/20161 Foundations of Strategy PSU MGMT #511 Dave Garten daveoutside@alum.mit.edu Week # 2 – External Analysis

2. 6/4/2016Dave Garten – Business Strategy2 External Analysis Why is external analysis important? X Success doesn’t occur in a vacuum. Relative to… Help identify your landing zone  A picture of the market: as it is, how it evolves and how it might be…  What/when new opportunities might exist Help identify strategies  Areas for competitive advantage, differentiation, first to market Scenario analysis - help understand alternatives, and possible competitor directions (game theory) (Can) force intellectual honesty

3. 6/4/2016Dave Garten – Business Strategy3 Industry Structure Source: Derived from Barney, Gaining & Sustaining Competitive Advantage Strategy Flexibility High Low Degree of Competition Low High Profitability Monopoly Oligolpoly Monopolistic Competition Pure Competition

4. 6/4/2016Dave Garten – Business Strategy4 Industry Structure Innovators Early Adopters Early Majority Late Majority Laggards Emerging Features Mature Quality & reliability Declining Price Product innovationProcess innovation Growth service

5. External Analysis–Closer look at Life Cycle Technology industries (e.g. pharma, semiconductors, computers) may retain features of emerging industries. Other industries (especially those providing basic necessities, e.g. food processing, construction) reach maturity, but may not decline. Industries may experience life cycle regeneration. Sales Sales 1900 ‘50 ‘60 ‘90 1930 50 60 90 MOTORCYCLES TV’s Life cycle model helps us to anticipate industry evolution-- -- but dangerous to assume any pre-determined pattern Color B&W Portable HDTV ?

6. 6/4/2016Dave Garten- Business Strategy6 External Analysis The 3 Components of external analysis 1. Trends 2. Industry structure 3. Company/organization analysis

7. 6/4/2016Dave Garten- Business Strategy7 Trends & Environment: “ PESTAL ” Political Telecom, deregulation, govt ownership, trade barriers, subsidies, free speech, etc. Economic Income, spending, interest rates, GDP, stock mkts, etc. Sociocultural Demographic, psychographic, education, etc. Technological New standards, new processes, new features, etc. Environmental International pressure groups, env. laws, waste regulations Legal Intellectual property, antitrust, etc.

8. Trends: Common Types Entry/exit of major firms, changes in industry growth rate Changes in degree of uncertainty and risk Diffusion of technical knowledge and innovations Changes in cost and efficiency Shift from standardized to differentiated products Regulatory policies / government legislation Changing societal concerns, attitudes, and lifestyles Internet and e-commerce opportunities Increasing globalization of industry Changes in long-term industry growth rate Changes in nature of product usage Product innovation/technological change

9. 6/4/2016Dave Garten- Business Strategy9 Industry Structure Opportunities Fragmented -> consolidation Mature ->incremental innovations, service Declining ->shakeout leadership, niche, divest Emerging -> TTM, locking up resources, switching cost “Network effect” -> standards, n**2 Source: Derived from Barney, Gaining & Sustaining Competitive Advantage

10. 6/4/2016Dave Garten- Business Strategy10 Industry Structure Threats Applying Porter’s 5 Forces 1.Threat of Entry  Economies of scale (production, distribution), Product differentiation (brand, switching costs), other cost advantage (know-how, patent, access to raw materials, location), contrived deterrence, govt 2.Threat of Rivalry  # of competitors, size/influence of competitors, industry growth rate, level of differentiation (vs. price), step function of capacity 3.Threat of substitutes  Deliver the product/service in a different way? 4.Suppliers  Bargaining power, # of companies, level of differentiation, threat of vertical integration, threat of substitutes 5.Customers  Mirror image of suppliers Vertical Horizontal Source: Derived from Barney, Gaining & Sustaining Competitive Advantage

11. Industry Structure - Strategic Group Example Geographical Scope 01020304050607080 Vertical Balance 00.51.01.52.0 INTERNATIONAL DOWNSTREAM OIL COMPANIES PRODUCTION COMPANIES INTEGRATED INTERNATIONAL MAJORS NATIONALLY-FOCUSED DOWNSTREAM COMPANIES INTEGRATED DOMESTIC OIL COMPANIES NestePetrofina Chevron Shell Total Mobil Exxon Statoil PDVSA Kuwait UnocalArco PetrobrasEN I Repsol Nippon Sun BP Texaco Elf Phillips Amoco Indian Oil Elf ENI DIVERSIFIED MAJORS

12. 6/4/2016Dave Garten- Business Strategy12 Defining an Industry Direct competitors Substitutes Complementors Tomorrow’s Competitors Be careful.. Are you in the buggy business or the transportation business?

13. 6/4/2016Dave Garten- Business Strategy13 Industry Transformation Evolutionary Predictable, stable Revolutionary – many changes simultaneously Latitude to influence industry structure Leader vs underdogs & entrants Experimentation -> convergence & stability Strategy implications Uncertainty Substitution Adapt – flexibility, options

14. 6/4/2016Dave Garten- Business Strategy14 Forecasting Disruption Source: Disruptive Technologies, catching the Wave, Joseph L. Bower and Clayton M. Christensen, HBR, 2000.

15. 6/4/2016Dave Garten- Business Strategy15 Forecasting Disruption Source: Rules of the Game, Scott D. Anthony, Strategy & Innovation, 2004

16. 6/4/2016Dave Garten- Business Strategy16 Forecasting Disruption Why do organizations get disrupted? Strategies to deal with disruption? X Planning:  Focus on customer use (gain understanding)  Sustaining or disruptive? Watch pioneers. Actions:  Influence the growth rate  Wait until emergence, then follow  Place in a separate org (Ambidextrous) for early years.

17. 6/4/2016Dave Garten- Business Strategy17 Competitors Benchmarking competitors The obvious -- financial ratios, market share The less obvious -- get into their head…  Primary research (customers, channel partners, etc)  How/why are they winning? Losing?  Project ahead Industry 2x2, 3x3, 4x4…. Relative MSS, industry growth rate, industry attractiveness, relative competitive position, maturity of business, SWOT summary (ext + int)…

18. Game Theory 70-75% say they consider competitors in making product and pricing decisions, only 8% report thinking through future competitive behavior… – Joel Urbany David Montgomery, and Marian Moore, “Competitive Reactions and Modes of Competitive Reasoning: Downplaying the Unpredictable?” Market Science Institute Report No 01-121, 2001. 6/4/2016Dave Garten- Business Strategy18

19. 6/4/2016Dave Garten- Business Strategy19 Competitors – Game Theory What is it? Framing strategic decisions as interactions between competitors Predicting outcomes of competitive situations w/ a few players Key concepts Cooperate or compete? Can show conditions where cooperation is more advantageous than competition Deter? Changing the payoffs in order to deter a competitor from certain actions Commit? Irrevocable deployments of resources that give credibility to threats Signal? Communication to influence a competitor’s decision. Problems with game theory Useful in explaining past behavior- weak in predicting the future Outcomes highly sensitive to small changes in assumptions

20. Boeing – Airbus Q1/Q2 1. Analyze the external environment for Boeing. Use a PESTAL analysis as described in week #2 slides. 2. Analyze the industry structure. What are the primary Opportunities and Threats for Boeing? Include use of Porter’s 5 Forces. 3. Game Theory… 6/4/2016Dave Garten- Business Strategy20

21. Boeing – Airbus Q3 6/4/2016Dave Garten- Business Strategy21 Yes No YesNo Boeing Develop the Super Jumbo? Airbus Develop the Super Jumbo? A: ____ B: ____ A: ____ B: ____ A: ____ B: ____ A: ____ B: ____